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February 2017

Slowing UK Service Sector in the face of inflationary pressures

Published: Tuesday 14 February 2017

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Service sector slowed down at the start of 2017

Inflation a key issue across the UK and Europe

By Rachael Kinsella

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In contrast to this week’s positive Manufacturing PMI figures, the UK service sector slowed down at the start of 2017, in the face of significant cost pressures. The index showed a drop to 54.5 from the 56.2 in January.

“We are seeing the effects of rising inflation and cost pressures across the UK – an increasing concern in the manufacturing industry, as we saw earlier this week, but cost issues are really coming to the fore in the UK’s service sector, as we saw the first slow in growth for the sector in the last quarter,” commented David Johnson, Director at currency brokerage, Halo Financial.

Increased concern: Cost issue coming to the fore in the UK's service sector

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“It’s not all doom and gloom, though,” Johnson continues, “as anything above 50 shows that the sector is still growing. Add to this the Bank of England’s more optimistic outlook for the UK economy yesterday, forecast to grow by two percent, and the positive manufacturing sector growth and output (despite slowing rates of growth), and we see that the UK economy is still battling on, apparently not too adversely affected by the Brexit decision, despite much talk of the economy collapsing post-referendum.”

“Positive sentiment across all sectors seems to be the prevailing theme – solid results and overall optimism came through as the positive takeaways from the recent PMI surveys and there seems to be opportunity for further business growth, both domestically and internationally.”

Yet despite the strong results and market optimism, it’s clear from recent reports that inflation is an issue across key sectors in both the UK and Europe. Costs for buying goods hit their highest for almost six years, with the cost of prices charged at a record high for the second month running. This could become an even bigger problem in the months to come, and markets are wary in response.

“Slowing of sector growth, inflationary pressures and their potential to rise further – and rapidly – all contribute to an uneasy overall market sentiment, and therefore have a noticeable effect on exchange rates. Strong performance in the sectors and a revised growth outlook have done little to help the Pound, as it continues to struggle under political and economic uncertainties from the UK, Europe and the US.”